Will Exchanges Crowd Out Employer Coverage?

An intriguing new analysis by McKinsey & Co projects a much bigger shift away from employer-sponsored insurance (ESI) under healthcare reform than the Congressional Budget Office (CBO) projected last year. Read it here: How US health care reform will affect employee benefits.

The article is worthwhile reading for anyone trying to understand the future of managed markets contracting and payer marketing.

Their headline projection—30 percent of employers will definitely or probably stop offering ESI after 2014—implies a massive shift from today’s world of managed markets. Not only will the uninsured gain coverage, but McKinsey projects that the individual insurance market will explode via the highly-regulated exchanges created by the PPACA.

How will exchanges contract with pharmaceutical manufacturers? Will plans offered on the exchanges contract more like Medicare Part D Prescription Drug Plans (PDPs), like commercial plans, or be something totally different? No one knows yet, so I’ll just highlight a few insights and guesses for now.

EXCHANGES 101

For those who don't know, the Patient Protection and Affordable Care Act (PPACA) creates insurance exchanges through which certain individuals and families will receive federal subsidies that reduce the cost of purchasing health insurance coverage. An exchange must be a governmental agency or nonprofit entity that is established by a state. Kaiser has a super useful summary of the law here: EXPLAINING HEALTH CARE REFORM: Questions About Health Insurance Exchange

Employers with more than 50 employees must offer health insurance or pay a per-worker penalty when workers obtain subsidized coverage through the exchanges. Hardcore wonks can read more about these subsidies courtesy of the CBO in the tantalizing page-turner Additional Information About CBO’s Baseline Projections of Federal Subsidies for Health Insurance Provided Through Exchanges.

I presume most plans sold through health insurance exchanges will include some type of pharmacy benefit, implying that Pharmacy Benefit Managers (PBMs) are the most likely candidates for managing these benefits as I noted last year in Health Reform: Impact on Drug Channels.

WHAT WILL HAPPEN?

McKinsey surveyed 1,300 employers to forecast how the mix of subsidies and penalties will affect employer-sponsored insurance (ESI). They project that many more employers will drop coverage than the CBO projects, thereby implying much greater usage of exchanges.

McKinsey thoughtlessly omitted any easy-to-follow color graphics, so I put together the chart below to illustrate the alternate projection implied by the article. Click the chart to enlarge it.

A couple of comments on the data:

• The CBO data come from its March 30, 2011, congressional testimony in Analysis of the Major Health Care Legislation Enacted in March 2010.
• McKinsey’s data comes from the survey results described in the article. Since the article doesn’t specify a precise year, I assume 2016 because that’s when the CBO projects exchanges to be fully-implemented. McKinsey’s article discusses the “% of employers dropping coverage,” which I have simplistically translated into “% of employees with coverage via exchanges” (with a tweak to account for employer size).
  

Here are some nuggets that caught my attention:

• 45 to 50 percent of employers say they will definitely or probably pursue alternatives to ESI in the years after 2014. Those alternatives include dropping coverage, offering it through a defined-contribution model, or in effect offering it only to certain employees.

• To make up for lost medical insurance, most employers that drop ESI will increase employee compensation in other ways, such as salary and other benefits like vacation time, retirement, or health-management programs. Employees think this will happen, too.

• At least 30 percent of employers would benefit economically by dropping health coverage even if they make employees 100 percent whole.

All in all, a thought-provoking article about another possible unanticipated outcome from last year's healthcare reform legislation.